Hill – Mankiw 9th Edn Chapter 3: Interdependence and the Gains from Trade
Mankiw, N. G. (2021) Principles of macroeconomics (9th ed.)
Principles of microeconomics (9th ed.)
Principles of economics (9th ed.)
Mason, OH: South-Western Cengage Learning.
University of New Brunswick, Saint John campus
Saint John, New Brunswick, Canada
Chapter 3 – Interdependence and the Gains from Trade
Here are some things to consider when reading this chapter.
- The false analogy of trade between people and trade between countries
The Commentary on Chapter 1 noted that trade between individuals and trade between countries are fundamentally different. If two individuals voluntarily start trading with each other, both are better off than before. If countries begin to trade or to expand trade (by removing some barriers to trade, such as tariffs), some people in the country will be better off and some will be worse off. A value judgement is necessary to judge whether the country as a whole is better off or worse off.
In this chapter, after explaining David Ricardo’s principle of comparative advantage in the context of two individuals trading, Mankiw writes that Ricardo “showed that both countries can gain by opening up trade and specializing based on comparative advantage” (p. 53). He adds: “Just as individuals can benefit from specialization and trade with one another, so can populations of people in different countries” (p. 54, my emphases).
- Some gain and some lose in a country as a result of trade – or do they?
Mankiw then acknowledges that trade between countries and trade between individuals are different: “each country has many people, and trade may affect them in different ways. When the United States exports food and imports cars, the impact on an American farmer is not the same as the impact on an American autoworker. As a result, international trade can make some individuals worse off, even as it makes the country as a whole better off.… Trade allows all countries to achieve greater prosperity” (p. 54 my emphases). His “Ask the Experts” box (p.55) shows that they think most Americans gain from trade with China, while those working in industries competing with Chinese imports are made worse off.
Yet in next paragraph he writes: “The principle of comparative advantage shows that trade can make everyone better off” (p. 54, my emphases). This may be an indirect reference to the idea that the gains from trade could potentially be redistributed to leave everyone better off, as noted in the next section.
When the chapter is summarized a few pages later the conclusion about the benefits of trade becomes even stronger and those made worse off disappear: “Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.… Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage” (p. 57).
What is a student to make of these seemingly contradictory statements? Are some people made worse off because of trade or not?
- Undiscussed value judgements
Mankiw describes what he sees as economists’ view about trade and trade policy: “Although economists often disagree on questions of policy, they are united in their support of free trade…. Even though the field of economics has broadened its scope and refined its theories since the time of Smith and Ricardo, economists’ opposition to trade restrictions is still based largely on the principle of comparative advantage” (p. 53, my emphases).
While it’s an exaggeration to say that economists are “united” on this question, as a generalization it’s likely accurate. But his last sentence seems to imply that the positive theory of comparative advantage has led economists to a normative conclusion about what policy should be. But we know from Chapter 2 that some value judgement is required to reach a normative conclusion from positive statements. There is no discussion of what that value judgement is in this chapter, but there are hints of what it might be based on.
Mankiw says that all countries can “achieve greater prosperity”, likely meaning greater average incomes. As well, he says everyone “can” be better off – presumably if the gains were somehow redistributed so that no one is left worse off. As no such redistribution takes place, this potential for everyone to be better off could be the basis of the value judgement supporting expanded trade. Or perhaps a value judgement is being made that the benefits to those made better off always outweigh the losses of those made worse off.
In a 2008 commentary that is well worth reading, Vanderbilt University economist Robert Driskill quotes a first sentences from a 2008 New York Times commentary by Mankiw who wrote: “No issue divides economists and mere Muggles [i.e. a person lacking a particular skill] more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the markets’ invisible hand, Joe Sixpack sees a threat to his livelihood.”
Driskill writes: “A non-economist might ask: What are these opportunities, and how do these economists judge them as more important than the threats?” After all,
trade helps some people and hurts others. In such a situation, why do economists claim that trade is good for the country? After all, the Joe Sixpacks are citizens of the country, and their losses are often large, painful, and traumatic, requiring dramatic life changes. Why should people think economists can be, in effect, high priests who tally up the benefits and losses to different individuals and pronounce the outcome good or bad for the group as a whole?
In fact, people shouldn’t. Any time a change in economic circumstances creates both winners and losers, the judgment of whether such change was good or bad for the group as a whole is problematic. It becomes a matter of moral philosophy, not number crunching. Economists, as a result of their training, have no more claim to know what is good for the country than Joe Sixpack. It’s really that simple.
Driskill asks why most economists support free trade while only being able to give poor arguments to support their position. He suggests that one explanation “is that their argument for free trade has become an institution: 200 years of tradition that has short-circuited their critical thinking.” Today’s generation of economics students need to sharpen their critical thinking skills, so they don’t fall into the same trap.
Chapter 9 discusses international trade and trade policy in more detail, so the Commentary for that chapter will return to this issue of value judgements in more detail. For now, let’s just note that there is no reason for anyone – including economics students – to be convinced that economists’ value judgements are any better than anyone else’s.
- The limitations of the comparative static analysis of trade
Whether considering moving from no trade to free trade or, more realistically, from trade with tariffs to free trade, the analysis considers only total incomes in the initial and the final equilibrium situations. However, an economy’s resources can’t move costlessly from one employment to another. The ‘adjustment costs’ involved – for example, time spent unemployed or acquiring new skills – need to be included in assessing the gains from trade or freer trade. The Commentary for Chapter 9 expands on this point, while noting that some specialized resources will not be able to move at all. Using the example in this chapter, specialized machinery used in potato production may be useless in helping to increase meat production.
- The limitations of assuming that comparative advantage is fixed
The analysis in this chapter assumes fixed production possibility frontiers whose characteristics determine comparative advantage. This is a snapshot picture of the economy but ignores the fact that quantities of productive resources as well as technologies change over time which, in turn, can change comparative advantage. As will be examined in Chapter 9 and the associated Commentary, economic policy can also attempt to influence comparative advantage and thus the course of a country’s economic development. As we’ll see there, many countries, including most of today’s developed economies have pursued such policies in the past.
Driskill, Robert (2008) ‘Why Do Economists Make Such Dismal Arguments About Trade?’, Foreign Policy, May/June. Available at: http://foreignpolicy.com/2008/05/27/why-do-economists-make-such-dismal-arguments-about-trade/
Mankiw, N. Gregory (2008) ‘Beyond the Noise on Free Trade’, New York Times, March 16.